I am a Managing Partner at Chicago-based Red Rocket Ventures, a growth consulting, executive coaching, shared executive and financial advisory firm based in Chicago. I am the author of 101 Startup Lessons—An Entrepreneur’s Handbook, a member of the Crains Tech 50 in Chicago, mentor at Techstars and an active venture investor via the FireStarter Fund. I am a past Ernst & Young "Entrepreneur of the Year" in the midwest, for my efforts as Founder & CEO of iExplore. You can follow me on Twitter at @RedRocketVC.

The 4 Key Drivers When Calculating Equity Splits Between Founders

I am often asked how best to divide up the equity between the founders in a new startup. That is a very big question, with lots of variables that go into calculating a fair equity split. Below are the top four drivers I consider, when coming up with a recommendation:

1. Who’s funding capital into the business?

If people are funding the business, they should get a premium, because at the end of the day, cash funding founders are acting no different than a seed stage investor. That means a 50/50 split, with all other things equal, would need to be adjusted for the cash investment. So, let’s say that one founder puts in $100,000 in seed capital, that could be worth 20% of a seed stage company’s valuation. So, a fair split, would be closer to 60/40 in favor of the funding founder, when diluted for the cash. Calculated as follows: original 50/50 diluted down 20% to 40/40 for the financing, and then the one founder investing cash gets that 20%, like any other investor would.

2. How important is the person’s role?

Key executives should get a premium stake over non-key executives. So, a CEO or CTO, would get a much higher stake than an office manager or a graphic designer, as an example. So, in this case, I would take your total ownership and divide it up by employee tiers. Maybe something like 10% each for five C-level executives; 2.5% each for 10 VP level executives and 1% each for 25 director/manager level staff (adding up to a total of 100%, with all other things being equal). Understand that not all of this will be granted day one, with everyone having higher stakes in the short run, but you will have an equity cushion to play with as the employee base scales.

3. Who’s taking a cash salary, or not?

People that are not taking a salary, should also get a premium stake. To me, that is no different than financing the business. So, if someone is deferring a $100,000 per year salary, this is like a 20% stake in a brand new startup. So, with all other things equal, a 50/50 split, would be closer to a 60/40 split, with the same calculation and logic we used in the cash investor example above.

4. Whose idea was it?

In my opinion, there should be a premium placed on being the originator of the idea. With all other things equal, that means that a 50/50 split between two co-founders, could be 60/40 based on the premium for coming up with the original idea, and for starting the initial development efforts and sourcing the original team.

And, please notice, I kept saying “with all others things equal” in each paragraph. You need to collectively take all four paragraphs into consideration, in calculating a fair equity split between the founders. And, keep in mind, there may be additional considerations to take into account, like contributing patents, sourcing investors or other value to the startup. So, make sure to take a holistic view of what a founder is bringing to the table, across the board.

But, keep in mind, splitting up the equity pie is only half of the exercise. This lesson should be read in conjunction with my other post on Vesting of Founder’s Stock. So, in the event the founders split ways, there are mechanisms in place to easily get back any unearned equity into the hands of the company.

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George Deeb is a startup consultant at Red Rocket Ventures, and author of “101 Startup Lessons–An Entrepreneur’s Handbook”.

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